Idea dips 5% as brokers cautious on merger gain

As telecom analysts turned cautious on the Idea- Vodafone+ merger with most saying the success of the deal depends majorly on achieving the estimated synergies of $10 billion over four years, Idea+ ‘s stock price lost another 4.8% to close at Rs 93. Most of the broking houses have also lowered their target price for the stock after the merger announcement.
As a result of investors’ scepticism about the gains from the merger, since the announcement on Monday, Idea shareholders have lost nearly Rs 5,400 crore in the stock with the telecom company’s current market value at Rs 33,495 crore.
On Monday, Vodafone and Idea announced the merger of their telecom services operations in India in a deal worth about $23 billion that will create the country’s largest telecom company with 400 million subscribers.
Initially Vodafone will hold 45% in the merged entity and Idea promoters 26%, which, over four years should become equal. Since the two operators will merge operations, share spectrum and other facilities, the current value of savings due to these synergies in the next four years is estimated at about Rs 67,000 crore.
Foreign broking major CLSA, which has cut Idea’s price target to Rs 90 from Rs 100, said realising merger synergies was key to deleveraging for the merged entity with a combined net debt of Rs 68,400 crore after Vodafone infuses Rs 39,500 crore equity into the company. CLSA analysts have a ‘sell’ rating on Idea.
Analysts at Ambit noted that to achieve the projected synergies, the merged company “will have to weather continued competition pressures from Jio and Airtel.” It said synergies will take long to fully kick in, in the fourth year of operation after the merger. “We remain sellers on Idea given the history of over-optimism on synergy benefits,” the report said. Ambit too has a target price of Rs 90 for the stock.
Religare Capital is cautious, especially about meeting synergy benefit target. “Both Vodafone and Idea are estimating synergies of Rs 14,000 crore (60% of this in operating expenses) at the end of year 4. We believe that weakening revenue market share (RMS) remains a key operating risk and estimate an RMS loss of Rs 4,200 crore for the combined entity in FY19. This will largely offset any synergy benefits and hence recovery in industry growth will remain the key driver.” It has a Rs 90 target for the stock with a ‘hold’ rating.
On Monday, soon after the impending news of the deal hit the market, the stock had shot up to a high of Rs 124 but crashed to a low of Rs 92 after the companies said the deal was valued at Rs 110 per share. It closed the session at Rs 97.60. On Tuesday it lost a further Rs 4.65.